## Tuesday, April 7, 2015

### 2013 AP Microeconomics Exam FRQ #3

2013 AP Microeconomics Exam FRQ #3

(a) Draw a CLG of the market for fireworks and show the market equilibrium price and quantity, labeled, Pe & Qe.
(b) Assume the noise from the fireworks disturbs all of the neighbours. On your graph in part (a), show each of the following.

(i)   The marginal social cost curve, labeled MSC
(ii)  The marginal social benefit curve, labeled, MSB

(c) Now assume instead, that all of your neighbours enjoy watching the fireworks.
(i)  In this case, is the market equilibrium quantity of fireworks greater than, less than, or equal to the socially optimal quantity?

As we can see, when the externality is drawn with the fireworks being enjoyed,, there still is an externality in that someone is benefitting from the fireworks,, and someone is not being compensated for providing that benefit.

Answer - the fireworks now generate a positive externality and the market equilibrium is less than the socially optimum quantity. There is still an externality and deadweight loss showing a benefit to a third party.

(ii) If the government bans fireworks will the deadweight loss, increase, decrease, or remains the same.

If people enjoy fireworks and the government bans them,, then society is moved farther from the socially optimal quantity. Remember, DWL is inefficiency meaning that some people are not getting served that should,, that is why with a positive externality the government usually wants to subsidise the cost so that more people will have the merit good.

So, this is what the deadweight looks like after a government ban.

### 2013 Microeconomics Exam FRQ #2

2013 Microeconomics Exam FRQ #2

(a) What strategy should Piecrust choose if LaPizza chooses to advertise? Explain using the dollar values in the payoff matrix.

Obviously \$250 > \$180 so PieCrust will choose to advertise also.

(b) What is the dominant strategy, if any for LaPizza? Explain using the dollar values in the payoff matrix.

If PieCrust advertises LaPizza has two choices, to either advertise or not advertise. LaPizza will do better to not advertise as \$300 > \$200.

If PieCrust does not advertise LaPizza has two choices to advertise or not to advertise. LaPizza  will do better to advertise as \$500 > \$400.

Answer - LaPIzza does not have a dominant strategy (a strategy it would do no matter what PieCrust would do) LaPizza's best strategy is to do the opposite of PieCrust.

(c) In the Nash Equilibrium, determine each of the following.
(i) PirCrust's daily profit.
(ii) LaPizza's daily profit.

A Nash Equilibrium exists when there is no unilateral profitable deviation from any of the players involved. In other words, no player in the game would take a different action as long as every other player remains the same. Nash Equilibria are self-enforcing; when players are at a Nash Equilibrium they have no desire to move because they will be worse off.

Answer - PieCrusts daily profit will be \$450 and LaPizza's daily profit will be \$300

(d) Suppose the advertising costs decrease by \$60 per day. Redraw the payoff Matrix to reflect the effects of the higher advertising costs.

### 2013 Microeconomics Exam FRQ #1

2013 Microeconomics Exam FRQ #1

(a) Assume that the profit maximising monopolist is unregulated. Using the labelling in the graph, identify each of the following.

(i) the monopolist's quantity of output.

It is a profit maximising monopolist so profit maximising is where MR = MC.

Answer - the monopolist's quantity of output is at Q1.

(ii) The monopolists price.
Answer - The monopolists price is at P3.

(iii) The Profit earned by the monopolist.
Answer - Area of Profit, P1,P3,a,c

(b) Now assume that the monopolist can perfectly price discriminate. Using the labelling of the graph, identify each of the following.
(i) the quantity produced
(ii) the total revenue received by the monopolist.

Answer - P4,f,Q3,0   all in red is the total revenue.

(c) Instead, assume the monopolist charges a single price and is regulated to produce the socially efficient quantity. Using the labelling of the graph identify each of the following.
(i) The socially efficient quantity.
(ii) The consumer surplus at the socially efficient quantity.

The socially efficient quantity is allocative efficiency where P = MC or D = MC

Answer - the socially efficient quantity is at Q3 & the consumer surplus is P1,P4,f.

(d) Is the monopolist facing the regulation in part (c) earning positive economic profit, zero economic profit, or incurring a loss. Explain.

The regulated monopolist is making zero economic profit as he is covering his ATC's.

Answer - the monopolist is making zero economic profit as the price equals the ATC.

(e) Is point f in the elastic, inelastic, or unit elastic section of the demand curve? Explain.

Answer - f is in the inelastic section of the curve as the MR (marginal revenue) is negative.

You must train daily.